Calcutta, June 1: Public sector banks and financial institutions (FIs) have approached the finance ministry with a plan to restructure and reschedule state government-guaranteed debts. The proposal requires the government to replace the state government-backed debts with state development loans.

Explaining the rationale behind the move, senior bankers said state-guaranteed debts carry high coupon rates and the government agencies often fail to service them. “If these loans are converted into state development loans (SDLs), there are mutual funds and insurance companies waiting to refinance them,” they added.

A Reserve Bank spokesperson said the failure to honour securities is a big problem for banks, but the central bank has no role to play in finding a solution to it. “However, the RBI is ready to advise banks on the matter.”

Refinancing, a process in which high-cost loans are replaced with low-cost borrowings, helps an institution availing of the facility to unlock cash and reduce the scope for mismatches in assets and liabilities.

The outstanding amount of state guaranteed debt in the markets is estimated to be over Rs 2 lakh crore. However, this figure does not include some of the debt that has matured and where payments are overdue.

Sources say banks have had defaults on many of the securities backed by state governments, but no amount has been set aside (provisioning) to cover the risk. The RBI guidelines on provisioning do not apply to state government securities, though their risk weights have to be increased if the interest is not paid on time.

Redeeming such guaranteed, but high-cost, loans is expected to have a salutary effect on the finances of the PSUs, utilities and special purpose vehicles that finally use this money for their projects.

Sources say refinancing these debts with state development loans will push down the interest they carry to 7 per cent — the rate currently ruling in the market. The conversion will bring in liquidity, unlike the state-guaranteed papers, which are completely illiquid.